INSURANCE AND REINSURANCE; A HISTORICAL CHRONOLOGY: Global Expansion, Reinsurance, San Francisco and Swiss Re History

 

Global expansion

As the series of wars in Europe and the Anglo-American conflict came to an end in 1815, insurance was finally able to spread on a broader scale beyond Europe and the USA, which had imported the British invention almost from the start. 

Based on growing trade, and in the wake of emigration, the British system was gradually adopted in most white settler colonies in the Americas, Australia and New Zealand, and in South Africa. 

It remained a privilege of the European settlers and traders to insure themselves and their businesses. Local communities rarely embraced the concept, preferring instead to remain with their traditional ways of guarding against misfortune.

Most non-European societies preferred forms of family and village solidarity, alongside trusting in God. And the Europeans, for their part, initially showed no interest in insuring others. 

In India, for instance, insurance was restricted to British subjects as locals were suspected of not being morally fit to withstand the temptations of fraud. 

Also, they were thought to be too big a risk for life insurance on account of their perceived lower living standards. Ironically, the worst risks for life insurers turned out to be young British officers who were often exposed to severe health problems in the tropical climates of the colonies and tended to die prematurely.

Yet, India was to become important as a springboard for the spread of insurance into the Far East. The East India Company dominated insurance on the Subcontinent.

During the middle Ages, many countries allowed begging for those who had lost their house and goods after a fire. The fire of Berne, Switzerland, in 1405 killed over 100 people and destroyed more than 600 houses.

But underwriting risks there from a London office was almost impossible, since it could take up to two years to exchange letters with India. 

The alternative was to demand higher risk premiums, which prompted agency houses in Kolkata to set up their own insurance, thereby bringing the business further into Asia.

Singapore in 1850. From the early 19th century on Singapore was to become one of the most important trading hubs in Asia. As such it contributed much to the spread of insurance into East Asia. It was also to become important in the development of the automobile industry.

In the late 1880s, the Singapore-based trading company Boustead & Co., which had served as an agency for Liverpool’s Royal Insurance since 1860, set up the first rubber plantations on the Malay Peninsula.

Dutch insurance brokers in Indonesia targeted Chinese businesses as clients. Advertisement around 1900 of a broker representing various Dutch insurance companies.

From 1819 on, thanks to Thomas Stamford Raffles, Singapore was to emerge as the new hub for trade in South East Asia, and it grew to a gateway for many insurance companies on their way to the Dutch East Indies. 

In the late 1880s, a Singapore-based trading company, which had served as an agency for Liverpool’s Royal Insurance since 1860, set up the first rubber plantations on the Malay Peninsula. This kind of combined business approach had entrepreneurs or agencies provide insurance to their own and others’ businesses. In those days this was common and practiced by large Asian corporations. 

In Latin America, insurance was imported on a large scale by European immigrants. 

The British companies concentrated on trade-related risks while immigrants spread insurance to a larger population.

German Chancellor Otto von Bismarck introduced social security programs in the 1880s. Germany’s system was the first of its kind in the world. Old age pensions, accident insurance, medical care and unemployment insurance were afterwards soon introduced throughout the world.

Often such companies were based on mutuality, albeit with more modern ways of operating than the traditional friendly societies. The spread of personal insurance was mainly a consequence of the massive migration from Europe that took place in the 19th and early 20th centuries. 

With growing national concerns over the domination of the British, many Latin American countries later resorted to legal reforms designed to protect local insurers against foreign companies. 

Many countries thus saw a large diversity of local insurers soliciting the business, and catering to the different needs of clients with Italian, Spanish, English, or German backgrounds, often signaling their origin and target segment in company names such as la Anglo-Argentina, Franco-Argentina, or Germano-Argentina.

India with its long tradition of trade has a history which goes back several millennia. Early forms of insurance can be dated back to the third century BCE. In the late 18th century British insurance companies operated on the Subcontinent through agency houses. In 1818, a Scotsman founded the first modern insurance company to be incorporated in India. Indian agency houses helped spread insurance further into Asia.

The Swadeshi movement at the beginning of the 20th century led to the foundation of many Indian owned insurance companies. The New India was to be the first wholly Indian owned insurer. By the 1950s it had built a global network of agencies. Swiss Re was very closely associated with the Indian market covering British companies’ risks there as early as 1865. From 1929 on Swiss Re dealt directly with the Indian insurers and became the most important re-insurer for life business helping the Indian industry to grow, despite fierce competition from the British insurers.

Across the African continent, especially in Sub-Saharan Africa, it was South Africa that was to take the lead. Dutch and British immigrants founded combined fire and life insurance companies already in the 1830s. In the early 20th century the South African state took a unique approach by choosing to do without social insurance and leaving old age provision to life insurers. At the time, many countries had adopted social insurance schemes based on the German model invented by Chancellor Otto von Bismarck to appease the growing proletarian classes. 

By contrast, when confronted with large work forces flocking to the cities after World War I, the South African government created jobs with tied-in pensions and medical provision. Over the next decades, the country not only attained the worldwide highest proportion of life insurance, or long-term insurance, as it was to be called, but South Africa became a leading expert in life market innovations. The non-life, or short-term market, continued to be dominated by foreign, mainly English companies for some time. 

In the second half of the 19th century, the rapid growth in trade, industrialization, urban development, traffic, and communication had created an immense need for insurance, and by the turn of the century the industry was spanning the globe. 

But it also was about to reach its limits.

Emigration was an important means to export the concept of insurance. While property insurance was mainly exported by tradespeople, life insurance companies were often founded by emigrants who copied companies they had known at home.

Often these were based on mutuality and reflected the origin of the founders and the targeted clients in their names such as in this picture of the Germano-Argentina, which also practiced mutual help in the form of motorist assistance.

Cape Town in the early 20th century. South Africa took the lead in developing insurance in Africa

Insurance in Eastern Europe was flourishing at the turn of the 19th to the 20th century. Many Eastern European countries had started founding local insurance companies in the second half of the 19th century. In many markets such as Poland early forms of fire insurance can be traced back to the 16^th century. Eastern European reinsurers were active on the world stage, such as several Bulgarian reinsurers who operated in the US market in the early 20th century. Romania which at the time was in the center of Europe attracted investors and competed with many Western European countries. The first Romanian insurance company DACIA was founded in 1871.

Motor policy of the African Solidarity Insurance in Addis Ababa, 1964. Ethiopia was one of the African countries which modernized in the 1950s and 60s. This included a thriving insurance industry.

Insurance in Sub-Saharan Africa was for a long time dominated by the colonial powers. Portuguese, French, British, and German traders set up insurance companies mainly in trading posts insuring their own interests and subjects. The client base in Africa significantly increased with motor insurance. In 1976 African Re, which had been founded with the aid of the African Development Bank, started business on an international basis.

Office of the Sun Fire Insurance in King William’s Town, South Africa around 1920.

Trade stand of the General Accident Insurance in Kolkata in 1921.

Reinsurance

Both the size and number of risks to be insured began outstripping the capacities of the insurance industry towards the second half of the 19th century. Traditionally, insurers resorted to sharing risks among each other or re-insuring with other insurers. 

By implication if not by design, however, this practice required competitors to grant each other access to their books. It also increased the likelihood of accumulating risks regionally and in certain lines of business. 

One way of avoiding these problems was to seek reinsurance across national borders. But this again meant that capital would flow out of national economies, and capital at the time was a sought-after commodity needed for keeping up with industrial and economic development. 

Early specialized reinsurance companies such as Cologne Re or Swiss Re were thus founded to stem the outflow of capital and strengthen national economies. Moreover, large catastrophes such as the fires of Hamburg in Germany and Glarus in Switzerland had increased the need for spreading risks beyond local insurers. 

Founding re-insurers, rather than just founding additional insurance companies, proved to be an efficient way of providing additional risk capital. Re-insurers were comparatively inexpensive to set up and run, not needing the large sales-force of direct insurers. 

Also, re-insurers started spreading risks more broadly than their clients. They tended to be more international, for one thing, and they were active in most or all lines of business known at the time, which allowed offsetting losses in one line with gains in another. 

The fledgling re-insurers were off to a bumpy start, however, as international business led to large losses. Risk assessment outside the L & H business was virtually non-existent in those days. 

Re-insurers had to rely on the word of their clients or brokers and apply the famous uberrima fides or utmost good faith principle. 

Many insurers could not resist offloading their worst risks onto re-insurers, or charging re-insurers excessively for the cost of acquiring business. For a while, it looked as if the new business idea was turning into a complete failure. Only gradually did the industry come into its own through much stricter underwriting discipline, such as Swiss-Re’s, and by adopting a business model, introduced by Munich Re, which allowed cedents to share in the success of re-insurers. 

Even though the ban on reinsurance in England had been lifted in 1864, the Continent was to be the dominant provider of global reinsurance. 

The English markets had developed a well-functioning coinsurance system which for some time hindered the development of proper English reinsurance companies. 

This also allowed continental re-insurers to build up a strong presence in the by then all-important and still growing US market. 

It was there that the global network of insurance and reinsurance was to face its hardest test yet.

While the first pure reinsurance companies came into existence around the middle of the 19th century, any direct insurers had already been practicing reinsurance for some decades. Many companies later advertised as both insurer and reinsurers such as the above pictured S.I.A.R. in Italy.

Glarus after the fire in 1861. The fire is said to have led to the foundation of Swiss Re. While certainly it highlighted the need for reinsurance there is no direct evidence in the records indicating that Swiss Re was founded because of the fire.

Rather, the founding fathers aimed at curbing the outflow of reinsurance premiums to foreign insurers.

The Great Fire of Hamburg in 1842 was the first large loss to shake the by then already international insurance industry. Many British insurers were faced with enormous losses and subsequently retreated from the German market. The foundation of the world’s oldest independent reinsurance company Kolner Ruck (Cologne Re) is associated with the Great Hamburg Fire, but also here endeavors to keep reinsurance premiums in the country appear to have been at least as important for its foundation.

San Francisco

“The earthquake shook down in San Francisco hundreds of thousands of dollars’ worth of walls and chimneys. But the conflagration that followed burned up hundreds of millions of dollars’ worth of property. There is no estimating within hundreds of millions the actual damage wrought.” The start of Jack London’s article for the Collier’s Weekly issue of May 6, 1906 directly points to the biggest problem confronting insurers and reinsurers in the aftermath of the catastrophe: the conflagration that caused the so far biggest-ever loss in insurance history. 

Fire following earthquake had been excluded from many insurance contracts, but the scene of devastation made it impossible to determine whether the fires had been caused directly by the earthquake. 

A heated dispute arose in the insurance industry far beyond the US as companies from almost the entire insurance world had a share in the losses. 

Should insurers pay even if it was clear that there was no legal obligation to do so? In most of the cases it was impossible to prove how the fire had come about, however, and eventually insurers started paying out regardless of the wording of their clauses. 

“The bankers and business men have already set about making preparations to rebuild San Francisco” noted Jack London at the end of his article. 

Only three years later the city was rebuilt with the help of a largely foreign insurance industry. 

Nevertheless, the 20th century was to have many more and unexpected challenges in store for insurers.

Also in 1906, only four months after San Francisco, the Chilean city of Valparaiso was hit by a severe earthquake killing almost 4 000 people, more than had died in San Francisco. Even though Valparaiso was the insurance center of Chile at the time, there are no records on how much insurers paid for the losses.

A Junta de Reconstruccion (Board for Reconstruction) was formed after the earthquake and with the help of foreign payments the city was reconstructed within three years.

Front page of the San Francisco Examiner four days after the earthquake.

San Francisco after the earthquake 

and San Francisco reconstructed three years later.

Swiss Re History

The evolution of a global risk expert

Swiss Re’s rise to become the global expert in taking and managing risks mirrors the dramatic social, economic and political development of the last 150 years. Swiss Re was established in 1863 to meet demand for an independent re-insurer that would spread risk in a rapidly changing world. The following 150 years, a period of unprecedented change driven by a revolution in science and technology, have seen Swiss Re become a leading international provider of reinsurance capital and risk expertise. 

Rising from the ashes 

Rapid industrialization and urbanization throughout the 1800s were creating concentrations of risk, requiring insurers to diversify their exposures. A clear role was emerging for independent reinsurers that could shoulder and spread insurers’ risks, develop expertise and provide capital when it was critically needed. 

The world’s first dedicated and independent re-insurer, Cologne Re, was established in the aftermath of the Hamburg fire of 1842. Swiss Re was to be the first such company outside of Germany. 

Swiss Re’s beginnings are often associated with the devastating fire that destroyed the thriving Swiss town of Glarus in May 1861. The fire, which hit some local insurers with claims five times their reserves, highlighted the threat of major catastrophes to the Swiss insurance industry and demonstrated the need for reinsurance protection to provide protection for events with a low frequency but as yet unknown severity. Immediately after the fire, the insurance industry discussed setting up a cantonal reinsurance pool but the plans never materialized.

Instead, the St. Gallen based insurer Helvetia set up a new fire insurance company and shortly after its director Moritz Ignaz Grossmann proposed that a Swiss re-insurer should be founded in Zurich. 

The main reason for doing so, Grossmann wrote, was to keep reinsurance premiums in Switzerland rather than re-insuring with French and English insurers. 

The Swiss Reinsurance Company first opened its doors in Zurich on December 19, 1863, with CHF 6 million of share capital raised from a diverse group of investors, including two Swiss banks.

Swiss Re’s offices in 1983.

Clockwise from top left: Giuseppe (Josef) Besso (1839–1901), brother of Marco Besso from Trieste, director of Generali insurance. Giuseppe Besso was general manager of Swiss Re from 1865 to 1879.

Charles Simon (1862–1942), general manager of Swiss Re from 1900 to 1919 and later chairman of the board of directors.

Erwin Hurlimann (1880–1942), the first Swiss general manager of Swiss Re from 1919 to 1930. Later chairman of the board and honorary chairman.

Moritz Ignaz Grossmann (1830–1910), director of Helvetia Insurance and founder of Swiss Re.

Fundamentals of success

Swiss Re’s early leaders established the sound principles of reinsurance that have been followed by successive generations of Swiss Re managers ever since. From the very start, Swiss Re was to be an international reinsurance company that spread its risks geographically, built strong client relationships, and developed access to a diverse capital base. 

The early years were difficult for Swiss Re – reinsurance was a new concept that lacked the sophisticated risk management tools of more recent times. The primary insurance market was far from transparent.

As a consequence, client relationships had to be rooted in trust and “utmost good faith” rather than knowledge and facts. 

In these first challenging years, Grossmann turned to Giuseppe Besso, a member of the famous Besso family associated with the Italian insurer Asscuriazoni Generali.

Besso accelerated Swiss Re’s international diversification and continued to build the company as a financially robust and independent re-insurer. 

Diversified from the start 

Right from the start Swiss Re had an international outlook, with only two of its 18 early contracts written with Swiss insurers. 

By the turn of the twentieth century Swiss Re was already re-insuring risks in Europe, the US, Latin America, Russia and Asia. It was also beginning to establish a global network, opening an overseas office and looking to underwrite directly in key international markets.

The re-insurer also looked to spread risk across an increasing number of lines of business, writing its first marine reinsurance in 1864, the first life reinsurance policies in 1865, an accident and health contract in 1881, and motor reinsurance in 1901. 

The form of reinsurance contracts also evolved – in 1890 Swiss Re underwrote its first excess of loss contract, a type of reinsurance that pays claims above an agreed level of losses, rather than a proportion of all an insurer’s losses. 

This change in approach would enable reinsurers to focus on the less frequent catastrophic risks. In a sense, the modern age of reinsurance had begun. 

Catastrophe losses

The first decades of the twentieth century were marked by growth in both international exposures and single large risks – demonstrated by the Spanish Flu epidemic in 1918, which led to a CHF 1 million loss for Swiss Re, and by the sinking of the Titanic in 1912, also insured by Swiss Re. 

However, it was the catastrophic 1906 San Francisco Earthquake that was to be the insurance and reinsurance industry’s wake-up call. The earthquake and subsequent fire that swept through San Francisco was a market changing event. 

The extent of the damage made insurers rethink the potential size of losses, as well as the importance of seeking well-capitalized counter parties. 

Within three years of the quake, San Francisco had been largely rebuilt thanks to payments made by the insurance and reinsurance industry. The majority of claims were paid by foreign companies, demonstrating just how globalized the industry had already become. 

For Swiss Re, the earthquake generated the biggest single loss as a percentage of net premiums in the company’s history, but reinforced Swiss Re’s reputation as a financially secure and reliable counter party in the US and the UK where the re-insurer honored its contracts to cedants. 

Global market access

Above all else, the San Francisco earthquake highlighted the need for further geographical and product diversification, leading Swiss Re to make a number of acquisitions.

Acquisitions were to feature early on in Swiss Re’s history, and continue well into modern times. In addition to helping spread risk internationally, acquisitions give access to new business, particularly where strong relationships between local insurers and reinsurers make it difficult to grow. 

Early acquisitions saw Swiss Re gain footholds in the all-important UK and German markets through stakes in the Mercantile and General Insurance Company (M&G) in 1915 and Bayerische Ruckversicherung of Munich in 1924. 

Financial crisis 

The 1929 stock market crash in the US and subsequent Great Depression showed insurers and reinsurers for the first time that they were exposed to significant risks on the asset side of the balance sheet. 

The crash led to write downs of assets at Swiss Re amounting to almost CHF 26 million, although the company was saved by its accumulation of special reserves – some CHF 30 million were taken from these reserves in 1931 to cover record losses. 

However, Swiss Re learnt valuable lessons, and the crisis marked the birth of a more prudent asset liability management at Swiss Re, an important risk management tool that continues to be used by insurers today.

Redrawing the map 

While German and Russian reinsurers were expelled from international business around the time of the two World Wars, Swiss Re was able to capture a market leading position in the US. 

However, the radically different world that would emerge after the Second World War constrained reinsurers’ ability to spread risk. 

A number of markets were now off limits with those in Central and Eastern Europe slipping behind the Iron Curtain. 

Others, such as Brazil and India, became state owned. 

At the same time, other markets were enjoying a boom in consumer spending, leading to higher concentrations of risk in markets like the US and Europe. 

Swiss Re continued to seek geographical and product diversification, developing a leading presence in new markets, including Canada, Australia, South Africa and then Asia. 

Post war boom 

The technology boom and growing concentration of risk in mature markets after the Second World War led to growing demand for risk management, as well as greater expertise from insurers and their reinsurers. 

In response, Swiss Re looked to share its risk expertise through training and communication, a key part of the re-insurer's business culture and brand ever since. 

It opened the Swiss Insurance Training Centre (SITC) in 1960 to provide technical training, particularly to insurers in emerging markets. 

Swiss Re’s sigma unit began publishing its trade mark economic research in 1968, and the unit continues to generate some of the most valued data and analysis available on the insurance market. 

Focus on core business 

In response to the growth in risk management and the trend towards greater self-retention in the 1980s, Swiss Re began expanding its service offering, acquiring insurance service companies, as well as increasing its participation in the primary insurance market. 

However, although dependent upon each other, Swiss Re discovered that the actual management of a primary and a reinsurance company had little in common. 

In 1994 a new management team refocused the company’s operations back on reinsurance, reinvesting the proceeds from the sale of its primary insurance businesses in achieving its strategic goal of becoming the world’s largest re-insurer. 

Growing catastrophe exposures and an increasingly complex and globalized risk landscape were beginning to drive demand for large, well rated managers of capital and risk.

Swiss Re signed its first reinsurance contract with Helvetia, one of its founding companies, in 1863

The company’s articles of association were approved on 19 December 1863 and signed by the famous Swiss author Gottfried Keller as a clerk of the Canton of Zurich government.

Swiss Re History

Swiss Re sought to grow its life reinsurance business, headquartered in London, and develop its Insurance Linked Securities offering. It also developed its direct corporate insurance unit and further globalized its non-life reinsurance operations. 

In the 1970s Swiss Re had been one of the first reinsurers to recognize the importance of emerging markets. In more recent years it began opening offices in key markets, seeking to build strong relationships and expertise through a local presence – Swiss Re obtained licenses in Korea in 2002, China in 2003 and Japan and Taiwan in 2004. 

During the 1990s, Swiss Re took on much of its current corporate form – it adopted a single brand operating from one global capital base, providing the highest levels of financial strength, expertise and tools to clients, whilst remaining attractive to a wide range of capital providers. 

New risk frontiers 

Following Hurricane Andrew in 1992, which was the largest insurance industry loss at that time, Swiss Re began working with Swiss bank Credit Suisse to develop alternative financial and risk transfer solutions. 

Developments in actuarial modelling and a growing interest in hedging risk in the 1980s, led Swiss Re to explore developments in capital markets and bring new financial products to existing and new clients. 

The growth in Swiss Re’s financial products business helped forge lasting relationships between reinsurers and capital markets that had not really existed before. 

A new era was beginning, and capital markets had been opened up as a source of additional and complimentary capacity. 

Innovative products were also being developed, including some of the first Insurance Linked Securities and Public Private Partnerships.

Swiss Re’s first office on the first floor of Schoffelgassse 1 in Zurich (house in the middle).

Mythenquai 60 in Zurich, Swiss Re’s first purpose built offices, opened in 1913.

Swiss Re’s new office building at Mythenquai 50 in Zurich, planned for 2017.

Market consolidation and expansion 

With strategy firmly fixed on its core reinsurance operations, Swiss Re strengthened its position by buying competitors in a number of markets during the 1990s and 2000s. 

The company made a series of acquisitions in the life reinsurance market between 1995 and 2001, mostly in the US but also with the re-acquisition of M&G. 

These acquisitions formed the basis of Swiss Re Life & Health, the company’s global life reinsurance business centered in London, which includes Admin-Re, an operation specializing in the acquisition and administration of run-off business. 

Swiss Re’s largest acquisition was the USD 7.6 billion deal in 2006 for GE Insurance Solutions, the fifth largest re-insurer at that time. The transaction reinforced the reinsurers leading position in the US reinsurance market, but also in other markets such as the UK or Germany. 

Challenging times 

The opening decade of the 21st century was challenging for global insurers and reinsurers, including Swiss Re. 

The terrorist attack on the World Trade Center in 2001 not only cost three thousand lives and billions of dollars in property damage, it also changed insurers thinking about the possible size of losses and the inter-connectivity and accumulation of seemingly unrelated risks. 

Swiss Re in London underwrote half of the USD 3.5 billion coverage for the WTC, and insurance claims from the attack contributed to Swiss Re’s first net loss since 1868. 

It took five years before a New York Jury ruled in favour of Swiss Re and other insurers in the largest insurance litigation ever, confirming the attack was one event and not two, as the owner of the WTC had claimed.

The first decade of the 21st century put into question the insurability of some large risks. Hurricane Katrina, which produced the highest damages of any natural disaster in history, cost Swiss Re USD 1.2 billion. 

Although it demonstrated the resilience of the industry to absorb devastating losses, within six years the toll of the 2005 hurricane season was equaled by a string of natural catastrophe events in the Pacific region. 

It started with floods in Australia, a sequence of earthquakes first in New Zealand and later in Japan, followed by a tsunami, and the year finished with yet another flood in Thailand. 

The financial crisis of 2008 was also tough on Swiss Re. The company made a loss of CHF 864 million in 2008, mainly the result of investment losses and the performance of two Credit Default Swaps. 

After de-risking its asset portfolio and concentrating on its core reinsurance business, the company emerged from the crisis as a leading participant in the reinsurance market. 

Preparing for the future 

In 2011 Swiss Re implemented a new legal structure to support its strategic priorities and refine its business model. 

It created three separate business units, namely Swiss Re’s existing reinsurance business, along with two new entities for Corporate Solutions and Admin Re. 

The company also continues to invest in the future. In 2003 Swiss Re opened its award-winning St Mary Axe building, affectionately known as the Gherkin, while work began on a new building at Swiss Re’s headquarters in Zurich in 2012. 

By staying true to the fundamentals of reinsurance championed by Swiss Re’s early leaders, the importance of diversification and long lasting client relationships; Swiss Re has weathered many storms in its 150 year history, continuing to provide its clients with a secure partner in risk. 

The history of the company shows the pivotal role reinsurance has played in the management of risk. And with Swiss Re at the forefront, it remains well-positioned to carry on doing so.

30 St Mary Axe, London, was opened in 2004.

Yours truly

 

Emmanuel Sanyu Safali

The founder and host of

The Promise-Insurance Show on YouTube and TV

emma.safali@gmail.com

+256752187255